Some good reads from around the Web.
I once asked readers to admit they were nostalgic for the turbulent days of 2008 and 2009, when banks were going bust and stock markets were a bargain.
The post was slightly tongue-in-cheek, with my idea being to remind readers that the bad days don’t last forever, even if the headlines take a while to change.
There is a reason to lament more stable times, though, and that’s that buying cheap is the best guide you’ll get to good future returns from equities.
And cheapness tends to come hand-in-hand with fear and turmoil.
Spain is still partying like it’s 2009
Given how I supposedly love cheap markets and can look through bad headlines and gyrating share prices, I have asked myself if I should be putting more money to work in Europe – and in particular Spain.
While the economic slowdown has dragged on everywhere in the Western world, Spain feels like the clock stopped three years ago.
It’s several years ago that the US and UK authorities forced a bailout of their banking systems. Spain is still doing it. Last week saw its fourth attempt to shore its banks, after the all-but nationalisation of one of the biggest domestic lenders, Bankia.
And while Obama may be tearing his hair out about stubbornly high unemployment in the US, compared to Spain’s 24% rate, the US rate of around 8% seems a boon. UK GDP is dipping, but it’s diving again in Spain.
The credit crisis that nearly froze international trade and finance is still spluttering in Spain, too, albeit more evident in the very high yields on Spanish government bonds. The government’s move on Bankia was partly a response to rising fears among Spanish savers over the safety of their money.
Costa notta lotta
Given all this – replicated to a greater or lesser extent across peripheral Europe – why would anyone consider investing in Spain?
Because it’s seemingly dirt cheap, of course.
The Spanish market is down roughly 25% on the year, with the index flirting around the level it touched in early 2009.
In contrast US markets were recently making new highs. Even after its recent falls, the UK’s FTSE 100 is up over 50%.
This weakness is reflected in a very low P/E rating for the Spanish market of around 7.5, according to FT data. That compares to over 10 in the UK (still not exactly expensive) and around 14 in the US.
You might think that a low P/E is warranted, given Spain smells about as healthy as a morgue during a mortician’s strike. As a fan of the country and a semi-regular visitor, I don’t disagree it’s tough there.
My Spanish friends confirm the country is in a right mess. The structural problems behind youth unemployment are almost worse than the headline figures. Much of what makes Spain so great – such as its hedonistic lifestyle and its family-focused culture – is partly to blame for its woes. Then you have issues like an entire generation raised on consumer credit, who make British 20-somethings look like a legion of proto-Warren Buffetts.
The root and consequence of Spain’s problems is a crazy property boom that took people out of real jobs, took money away from productive investment – and that incidentally acted as a cesspit for much of the easy money that flowed here in Britain 5-10 years ago, too.
It’s very difficult to gauge how much of this has been unwound, but again the hidden cost (graduates who eschewed careers to work on building sites, for instance) could be even worse.
But there’s a but as big as any you’ll see at any Greek wedding.
Spain is international, too
The leading companies in Spain are as multinational ours or Germany’s, and more so than America’s. Even the big banks like Santander make the bulk of their money overseas.
It’s therefore somewhat irrational for shares in Spain to be particularly hard hit by the problems at home. They will certainly suffer in a worst-case scenario for Europe, but arguably the more highly-rated US ones will do at least as badly if the global economy turns south as a result.
Some of the discount is warranted because the big financial companies have a life-threatening Spanish asset base, even if they theoretically have plenty of productive assets overseas.
We all know now that a bank can be wiped out if a minority of its assets flounder. The surviving Spanish banks (most of the little ones have gone) have been setting aside money to reflect their shaky property loans, but nobody knows how much is enough.
You might also argue that there’s a certain markdown that’s justified because of the chaos that ejection from the Eurozone could cause.
But perhaps the biggest fear in a country that was a dictatorship in living memory is a return to those truly bad days. If Spain turned into a basket case like Argentina, we could see one of those once-in-a-century blow-ups that makes looking at the historical returns from international markets so revealing.
I don’t think that’s likely, and I believe Europe can cope with its problems – at least to an extent that will eventually justify much higher share prices.
In fact, some of the solutions to Europe’s woes such as restructuring in the South and higher spending by Germany could be a positive boon for corporates.
However so far I can’t bring myself to go overweight on Europe, even though I’m not a pure passive investor and I think the markets look cheap. I have considered buying shares in the likes of Santander and Telefonica, but instead I’ve restricted myself to tilting some of my index fund allocations more in Europe’s direction.
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to ship me my own automatic investing droid anytime soon, I need to automate as much of the investing process as possible, because the one human behaviour that does work for me is inertia:
